What does dividend distribution mean

Dividend distribution: what it means

A dividend is the distribution of a share of the profit that a stock corporation pays to its shareholders or a cooperative to its members.

This part of the profit is also known as the amount to be distributed or the profit distribution.

The amount of the dividend or whether it will be distributed at all is decided at the Annual General Meeting. All those who own a share in the relevant company are considered to be entitled to vote.

More on this: When as an investor you are entitled to receive dividend payments

The respective amount of the dividend is often based on the company's profit.

As a rule, part of the profit is retained and transferred to the reserves.

This is done to finance possible investments or to pay off debts. However, there is no generally applicable right to dividends.

For example, a dividend may not be paid out despite a profit if it is deemed necessary for business reasons.

If parts of the company have been sold at a profit, there is the possibility of a special dividend in certain cases, which is then paid independently of the annual surplus.

Dividend distribution: when it will be paid

At the annual general meeting, the dividend amount is proposed by the management board and approved by a simple majority.

The distribution is usually made on the day after the Annual General Meeting. This results in a so-called dividend discount on the price.

This is understood to mean the phenomenon that the share price often falls by an amount equal to the dividend after the dividend has been paid out.

The dividend markdown is related to the fact that investors are willing to pay less for the stock if the dividend has already been paid.

More: Earning Money With Dividends: How To Properly Do It

This is the case because the prices are always formed by supply and demand. In Germany it is common for the dividend to be paid out only once a year.

In other countries, multiple distributions or even quarterly dividend payments are possible.

The quarterly dividend is the common form in the USA, for example. Usually the dividend is given in currency units per unit, i.e. per share, for example 2 euros per share.

Sometimes, however, the dividend is also given as a percentage of the nominal value of the shares.

The dividend yield, which investors need to pay particular attention to, can be calculated from the dividend and the share price.

It indicates how high the share of the dividend is in the current share price.

How a company's dividend distribution is measured

A company's annual payout is usually based on what part of the surplus is not used for investments or debts.

This proportion varies from company to company.

Companies that are growing rapidly and want to get out of debt or have high investment needs to secure their competitive position usually do not pay out any dividends or only pay a small portion of the profit.

However, if a company is unable to grow or has little investment to make to operate, it can distribute all of its profits as dividends as long as no acquisitions are planned.

L’Oréal: French dividend championThe French cosmetics group L’Oréal is a European dividend champion that you should have on your dividend watch list. > read more

© Verlag für die Deutsche Wirtschaft AG, all rights reserved